Recently I took a client of mine to see about a half dozen homes in San Jose (Cambrian and Blossom Valley areas) and Campbell; all of them happened to be Open Houses situations. We saw an incredible range of marketing styles. Some agents were so “sleepy” that they didn’t get up to greet us. Others were orchestrating traffic of such high levels that we felt like it was some sort of overpacked party. It was so busy that you could hardly even pay attention to the house.

In that last example, with the frantic levels of visitors to the property, the listing agents had grossly underpriced the house to attract attention. It did – there was virtually no place to park on the street!

Why would the Realtors underprice a home by a very large amount? Here are a few reasons why they might:

• traffic – the agent can bring a lot of people through the house (granted, many cannot afford what it’s actually worth)
• that traffic can provide great leads to the agents for future buyers and sellers – the spin is “look how differently I market the home”
• get a ridiculous number of offers on the home – with more offers, agents hope to get massive overbidding and sell at a premium

By creating an extraordinarily chaotic environment, the listing agents hope to motivate serious buyers so that they feel compelled to write their best offer. But if it’s underpriced by $100,000 or more, how many of those buyers will be able to compete or really understand the game at hand to write a viable offer on the home?

Those browsing Silicon Valley real estate & visiting open homes may not be armed with a good agent. In a scenario like the one I described above, hapless consumers may find themselves with an aggressive listing agent who’s (understandably) anxious to claim more clients. My client and I overheard a consumer speak with an agent and tippey toe around the subject of whether or not he had a Realtor. “You’re working with me, now!” exclaimed the hungry agent. It felt downright predatory.

Should the buyer work with that agent to write an offer on the home? Would you?

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Sometimes the list price on a Silicon Valley home for sale isn’t at all what the listing agent or the seller is expecting in terms of a sales price.

Sometimes it’s closer to a lost leader – that is, it’s really only intended to get home buyers into the door. Lots of them. The idea is to create excitement, and hopefully a feeding frenzy with multiple offers.

Other times, of course, a house or condo in the San Jose area may be an overpriced listing. In those cases, it’s more like a “fishing expedition”. More like, “let’s see if anyone bites”. There are always a percentage of these on the market. When you see homes listed for 60, 90 or more days on the valley floor, most often the culprit is an inappropriately high price – and most buyers aren’t biting at that bait.

Right now, it’s a mixed market in Santa Clara County real estate. If you find a home you like, the next question is this: what’s it worth? And finally, what’s it worth to you? Many times, the best advice is to ignore the list price, if it’s a new home, and just do your homework on what the current competition is and what’s been selling.

You may find that the home you love is priced high, on the mark, a little low, or crazy low.

While it’s helpful to know what the average ratio is between list prices and sales price, that information can never substitute for market knowledge.  The most powerful figure to understand is the absorption rate or months of inventory (or days or weeks of inventory).  Six months of inventory is considered a balanced market.  The smaller the months of inventory is, the quicker the pace of the market, and the bigger a frenzy there is over good inventory. 
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In the last few weeks, I have been very busy with Silicon Valley home buyers and on average am writing at least two offers per week.  Most of the time, the listing agent requests that the offers be faxed or emailed in.

Why do so many listing agents do this? It’s faster, it’s more expedient. But it may not give you all the information you need to know if you’re a seller (or a seller’s agent).

This week, I had the pleasure of twice being able to present an offer “in person”. In the first case I presented my contract to both the listing agent and her clients at the agent’s Cupertino office.  In the second I met with the listing agent at the home my buyers were bidding on in San Jose’s Cambrian Park (the seller is out of the area).  We got into contract on the first and are waiting to hear on the second.  Both were multiple offer situations (one with 6 offers, the other other 5 bids).

By presenting in person, the agents can get additional information, ask questions, and lots more.  They can also size up each other, get a sense if they could work together and whether the other agent is competent, for instance.  In some cases, a personal meeting may leave the seller or listing agent uncomfortale. With mutliple offer situations, this is huge.  The “red flag” may be there in person but not via email.

My hat is off to all the good real estate agents in Santa Clara County who slow down long enough to meet with the Realtors or real estate licensees who have taken the time to draft an offer on their listings.  Professionalism like that is to be respected and appreciated. I know it matters to me!

Recently I have been involved with multiple offer situations, both on the listing (seller) side and on the buyer side. All of the multiple offer bidding events have involved first time homebuyers and in every case, at least one or some of the offers were presented with FHA backed financing.

Sometimes agents rush when they write up the purchase contract, and the offer is not well done; we call that “sloppy” and it’s not helpful to your position as a would-be homebuyer.  As a buyer, you won’t know which box needs to be checked or which blank filled in, but there are big areas that you can double check to make sure that your offer is “clean”, which will present you in a more favorable light and increase the odds that your offer will be the one the seller and the listing agent will want to work with.

1. If your offer is an FHA offer, make sure that the box on page 1 says so (there are boxes for FHA and VA offers on page one of the California Association of Realtors contract)
2. Make sure that the numbers all add up – the initial deposit, the increase of deposit (if any), the loan amount and balance of cash downpayment should all be listed and should add up to the correct number for your total purchase price.
3. The “loan terms” are supposed to be specified too. What’s the interest rate? Are there any points being paid – and if so, by whom? Blanks in that area are a problem because you have a finance contingency which relies upon everyone knowing those terms. Be specific.
4. It is doubly important – no, triply important – that your offer comes with a soid pre-approval letter.
5. Make sure that you give your agent a check, or a photocopy of the check you’ll use if your offer is accepted.

Once the offer is drafted, your agent should go through it with you so that you understand all the clauses and terms.  Ask your agent to double check everything; it’s better to take a lilttle longer and make sure it’s right than to get it off fast but sloppy.

Recently I’ve seen a few FHA offers from agents who’d rushed and many or all of the items listed above were off. In one case, the agent didn’t even include the loan amount.  In two offers recently, the real estate licensee hadn’t checked the FHA box when the contract was dependent upon it going through as FHA.

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Multiple offers are a joy to home sellers and a nightmare for home buyers.  There are many disclosures warning of the dangers of overbidding and giving away too many rights in the purchase agreement, and rightly so.  You certainly never want to give up that which will make you overly vulnerable (such as no contingencies for financing or property inspection).   At the same time, though, to actually be the winning bidder, your offer must be better than everyone else’s.  Financing terms can really “make or break” your offer.  Today we’ll discuss a couple of those financing terms: the initial deposit  & the increase of deposit (and related issues of liquidated damages and default).

What are financing terms?   They are all the details of how exactly you will pay for the home and get money into escrow.  For example:

• good faith deposit (initial deposit)
• increase of deposit (if needed)
• loan type (conventional, FHA, VA, seller carry?)
• loan costs (will you pay or are you asking the seller to help pay?)
• loan terms: are they realistic?
• is there a pre-approval letter or a pre-qualification letter?
• what is the total downpayment amount? (and % of purchase price)
• will you provide the “proof of funds” to the seller?
• will you submit a copy of the check with your offer?

The initial deposit or good faith deposit is the amount of money that you’re “putting down” with your offer.  If your contract to buy the home is accepted, that check will be cashed within a day or two, so make sure that you write one that will not bounce!  In the San Jose area, most real estate agents write the offer such that there are three business days to get that money into the title company (which handles escrow services in northern California most of the time), but make sure you know how many days it is because it can be variable.  It is written right in the contract, so read & understand it.

(Please note that except for the initial deposit, the rest of the contract will reference days, not business days, if your agent is using either the CAR or PRDS purchase agreement form, both of which are standard in Santa Clara County and San Jose generally.)

Smart real estate agents will usually look for 3% deposit when a home sells, preferably in the initial deposit, but possibly part in that first check and the balance in an “increase of deposit”, which normally would happen when all contingencies are removed.  If you are competing against other homebuyers and your deposit is less than 3%, your position is weakened relative to theirs.

Why does the 3% target matter so much?  The reason is that it’s connected to the liquidated damages clause.  The liquidated damages clause is something buyer and seller would need to agree to for it to be enforceable, so in our PRDS or CAR purchase agreement forms there’s a place for buyers and sellers to initial it if desired (and in my experience, everyone does initial for it).  The deposit (and possibly increase of deposit)  is the potential penalty if the buyer defaults on the purchase.  (I’ll speak of defaults below.)  

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Right now in San Jose (and Silicon Valley generally), entry level single family homes are selling very briskly. In many cases, sellers are getting multiple offers when they put their clean, updated home on the market with an appropriate price & good marketing.

I work with both buyers and sellers, and can show you what will help your position and what will hurt it if you are writing an offer in a “multiple offer” situation. This will be the first in a series (I can’t put it all into one post) of tips on how to write a more compelling offer when you’re up against other buyers.

Purchase agreements are all about price & terms. Usually price is the main factor, but sometimes the terms can really throw the balance one way or the other. Often by providing better terms, you can nose out the competition.  Or conversely, if a couple of offers are close to each other generally, but your terms are worse, your “position” will suffer for it.

What are “terms”?  They’re the “everything else” of the offer. Things like:

• initial deposit (amount/percent of offer price)
• as is (or do you ask for repairs?)
• number & length of contingencies
• documentation  (preapproval letter at a minimum)
• length of escrow, seller move-out timeframe
• who pays for what

Once I heard of  buyers who wrote in as a term of the offer that the sellers’ dog would stay with the property.  The sellers were so outraged that they refused to sell their house to those buyers at any price.

These are just a few of the terms found in an offer – aside from price, these may be the most important terms for your offer. If you mess up on some or all of these, your contract will be given less consideration by the seller.

Got great terms? That’s awesome. But don’t get too cocky – at the end of the day, the seller does still want fair market value. So for instance, if you have “all cash” and can close fast, that is great and most sellers will want to work with you. But they won’t take an enormous discount for it. If a home’s worth a million dollars and there are several offers at one million dollars (or close to it), that seller will probably not take an offer of $900,000, even if it is “all cash”. If the seller is in a big hurry, he or she might take $950,000 or $980,000. Most of all, it will make your bid the preferred one. But in most cases, the seller won’t take a 10 or 20% discount for all cash.  So get an appropriate understanding of the power of good terms, neither underestimating nor overestimating them.  Often, truly excellent terms may be “worth” 1 – 5% to a seller, depending on what kind of terms are involved. Each situation varies, of course.

Next post on this topic: a list of financing terms (questions I ask my buyers prior to drafting an offer with them) and a discussion of the initial deposit, increase of deposit, and related concepts of liquidated damages and defaults.

If you are a first time homebuyer looking to purchase a house in the Cambrian Park area of San Jose, I encourage you to consider moving on this plan sooner rather than later.  Home prices have stopped sinking and appear to be moving within a range of about 10%, which can easily be attributed to precise location, condition, or situation of the home sale. Meanwhile, interest rates are inching up, making homes less affordable than they were a few weeks ago.

Some of the bank owned homes in this part of San Jose are priced at fire sale prices.  Because of the affordability, they are getting a lot of attention from buyers, and I’m hearing more stories of multiple offers with the prices getting bid up from the list price.  This is not just happening in Cambrian, but all over San Jose where the prices are amazingly affordable for first-time homebuyers.  The availability of FHA backed financing and the $8,000 tax credit are incentivizing people to buy San Jose real estate priced at under $729,000. Investors are also getting in on the cleanup of low-priced homes and “all cash offers” are not unheard of.

Here are the basic real esate sales statistics (and trends) in Cambrian Park:

The lowest median price in recent months was in February, which of course reflects sales that happened in January.  This may well be a “seasonal fluctuation”. Homes are often cheapest in the dead of winter, and interest rates are often lowest then too, but selection is extremely limited.

For more information on Cambrian Park real estate sales and market trends, please see my online Real Estate Report for Cambrian.  You may view the last five years’ worth of closed data, or see it quarterly or annually. Or plug in your own address or that of a home that interests you in the “property analysis” tab and check out the recent listings, current homes for sale, pendings and solds in the immediate area.